UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): November 13, 2002
PIVOTAL CORPORATION
(Exact Name of Registrant as Specified in Charter)
British Columbia, Canada
(State or Other Jurisdiction of Incorporation)
000-26867 98-0366456
(Commission File Number) (IRS Employer Identification No.)
SUITE 700 - 858 BEATTY STREET
VANCOUVER, BRITISH COLUMBIA, V6B 1C1
CANADA
(Address of Principal Executive Offices and Zip Code)
Telephone (604) 699-8000
(Registrant's telephone number, including area code)
Not Applicable
(Former Name or Former Address, if Changed Since Last Report)
Item 2. Acquisition or Disposition of Assets
On October 23, 2002, Pivotal completed the merger of an indirect wholly-owned
subsidiary of Pivotal Corporation, Pivotal Merger Subsidiary, Inc., a Delaware
corporation, merged with and into MarketFirst Software, Inc., a Delaware
corporation. As such, MarketFirst Software, Inc. became an indirect wholly-owned
subsidiary of Pivotal Corporation. MarketFirst Software, Inc., the developer of
MarketFirst Release 4 software, is based in Mountain View, California. Under the
terms of the Agreement and Plan of Merger dated October 2, 2002, a copy of which
is attached hereto as Exhibit 2.1, the merger consideration was 725,000 shares
of common stock of Pivotal Corporation. In addition, $54,722 was paid to certain
management employees of MarketFirst Software, Inc. in satisfaction of rights to
which they were entitled upon the change of control effected by the merger. The
transaction will be accounted for under the purchase method of accounting.
Pivotal Corporation filed a current report on Form 8-K on October 29, 2002 to
report the transaction. This amendment to the initial Form 8-K current report
contains audited consolidated and unaudited condensed financial statements of
MarketFirst Software, Inc. and unaudited pro forma condensed combined financial
statements of Pivotal Corporation listed below and omitted from the initial Form
8-K current report.
Item 7. Financial Statements and Exhibits
(a) Financial Statements of Business Acquired
Audited Consolidated Financial Statements of MarketFirst Software,
Inc. as of and for the year ended December 31, 2001:
Independent Auditors' Report
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statement of Stockholders' Deficit and Comprehensive
Loss
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Unaudited Condensed Consolidated Financial Statements of MarketFirst
Software, Inc.
Condensed Consolidated Balance Sheet at September 30, 2002 and
December 31, 2001
Condensed Consolidated Statements of Operations for the Nine
Months Ended September 30, 2002 and 2001
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2002 and 2001
Notes to Condensed Consolidated Financial Statements
(b) Pro Forma Financial Information:
Unaudited Pro Forma Condensed Combined Financial Statements
Unaudited Pro Forma Condensed Combined Balance Sheet
Unaudited Pro Forma Condensed Combined Statements of Operations
for the Three Months Ended September 30, 2002
Unaudited Pro Forma Condensed Combined Statements of Operations
for the Year Ended June 30, 2002
Notes to the Unaudited Pro Forma Condensed Combined Financial
Statements
Independent Auditors' Report
The Board of Directors
MarketFirst Software, Inc.:
We have audited the accompanying consolidated balance sheet of MarketFirst
Software, Inc. and subsidiary (the Company) as of December 31, 2001, and the
related consolidated statements of operations, stockholders' deficit and
comprehensive loss, and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of MarketFirst
Software, Inc. and subsidiary as of December 31, 2001, and the results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
/s/ KPMG LLP
Mountain View, California
March 22, 2002 except as to Note 13,
which is as of November 22, 2002.
MARKETFIRST SOFTWARE, INC.
Consolidated Balance Sheet
December 31, 2001
Assets
Current assets:
Cash and cash equivalents $ 12,590,000
Accounts receivable, net of allowance for
doubtful accounts of $447,000 1,930,000
Other receivables 233,000
Prepaid expenses and other 525,000
---------------------
Total current assets 15,278,000
Property and equipment, net 1,819,000
Deposits and other assets 1,354,000
---------------------
Total assets $ 18,451,000
=====================
Liabilities, Redeemable Convertible Preferred
Stock and Warrants, and Stockholders' Deficit
Current liabilities:
Accounts payable $ 1,320,000
Accrued liabilities 2,940,000
Restructuring liabilities 5,013,000
Deferred revenue 1,754,000
---------------------
Total current liabilities 11,027,000
Long-term debt 150,000
---------------------
Total liabilities 11,177,000
---------------------
Commitments:
Redeemable convertible preferred stock and warrants,
$0.001 par value; 116,340,000 shares authorized;
106,483,491 shares issued and outstanding;
aggregate liquidation preference of $68,470,000 83,932,000
Stockholders' deficit:
Common stock, $0.001 par value; 115,000,000
shares authorized; 6,429,349 shares issued
and outstanding as of 2001 6,000
Additional paid-in capital 18,850,000
Deferred stock-based compensation (1,268,000)
Notes receivable from stockholders (164,000)
Accumulated other comprehensive loss (13,000)
Accumulated deficit (94,069,000)
---------------------
Total stockholders' deficit (76,658,000)
---------------------
Total liabilities, redeemable
convertible preferred stock and
warrants, and stockholders' deficit $ 18,451,000
=====================
See accompanying notes to consolidated financial statements.
MARKETFIRST SOFTWARE, INC.
Consolidated Statement of Operations
Year ended December 31, 2001
Revenues:
Hosting $ 4,411,000
Licenses 4,146,000
Professional services 4,035,000
-----------------
Total revenues 12,592,000
-----------------
Cost of revenues:
Hosting 2,477,000
Licenses 480,000
Professional services 2,955,000
Stock-based compensation* 454,000
-----------------
Total cost of revenues 6,366,000
-----------------
Gross profit 6,226,000
-----------------
Operating expenses:
Research and development 4,692,000
Sales and marketing 12,933,000
General and administrative 4,035,000
Stock-based compensation* 1,593,000
Restructuring and other charges 5,517,000
-----------------
Total operating expenses 28,770,000
-----------------
Operating loss (22,544,000)
Interest and other income, net 83,000
-----------------
Net loss before extraordinary item (22,461,000)
-----------------
Extraordinary loss from extinguishment of debts (404,000)
-----------------
Net loss before discontinued operations (22,865,000)
-----------------
Discontinued operations:
Loss from operations of FusionDM (80,000)
Loss on disposal of FusionDM (1,188,000)
-----------------
Net loss (24,133,000)
Accretion on redeemable convertible preferred stock (7,909,000)
-----------------
Net loss attributable to common stockholders $ (32,042,000)
=================
* Note: the amortization of deferred stock-based compensation related
to operating expenses is as follows:
Stock-based compensation:
Research and development $ 189,000
Sales and marketing 885,000
General and administrative 519,000
------------------
$ 1,593,000
==================
See accompanying notes to consolidated financial statements.
MARKETFIRST SOFTWARE, INC.
Consolidated Statement of Stockholders' Deficit and Comprehensive Loss
Year ended December 31, 2001
Notes Accumulated
Common stock Additional Deferred receivable other Total
------------------- paid-in stock-based from comprehensive Accumulated stockholders'
Shares Amount capital compensation stockholders loss deficit deficit
---------- ------- ------------ -------------- -------------- -------------- ------------- -------------
Balances as of
December 31, 2000 6,358,593 $ 6,000 $ 19,050,000 $ (3,538,000) $ (164,000) $ -- $(62,027,000) $(46,673,000)
Revaluation of
deferred stock
compensation related
to employee stock
option forfeitures -- -- (223,000) 233,000 -- -- -- --
Amortization of
stock-based
compensation -- -- -- 2,047,000 -- -- -- 2,047,000
Accretion on
Series D redeemable
convertible
preferred stock -- -- -- -- -- -- (76,000) (76,000)
Accretion on
Series F redeemable
convertible
preferred stock -- -- -- -- -- -- (7,833,000) (7,833,000)
Exercise of common
stock options 70,756 -- 23,000 -- -- -- -- 23,000
Comprehensive loss:
Foreign currency
translation
adjustment -- -- -- -- -- (13,000) -- (13,000)
Net loss -- -- -- -- -- -- (24,133,000) (24,133,000)
-------------
Total comprehensive
loss -- -- -- -- -- -- -- (24,146,000)
---------- ------- ------------ -------------- -------------- -------------- ------------- -------------
Balances as of
December 31, 2001 6,429,349 $ 6,000 $18,850,000 $ (1,268,000) (164,000) $ (13,000) $ (94,069,000) $(76,658,000)
========== ======= ============ ============== ============== ============== ============== =============
See accompanying notes to consolidated financial statements.
MARKETFIRST SOFTWARE, INC.
Consolidated Statement of Cash Flows
Year ended December 31, 2001
Cash flows from operating activities:
Net loss $ (24,133,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Loss from operations of FusionDM 80,000
Loss on disposed FusionDM 1,188,000
Depreciation and amortization 1,543,000
Impairment of long lived assets 1,027,000
Restructuring charges 3,933,000
Amortization of stock-based compensation 2,047,000
Loss from sales of property and equipment 358,000
Extraordinary loss from extinguishments of debts 404,000
Changes in operating assets and liabilities:
Accounts receivable 153,000
Other receivables 236,000
Prepaid expenses and other assets 61,000
Accounts payable and accrued liabilities (113,000)
Deferred revenue 673,000
----------------
Net cash used in operating activities (12,543,000)
----------------
Cash flows from investing activities:
Purchase of property and equipment (660,000)
Proceeds from sale of discontinued operations 1,500,000
Deposits and other assets (91,000)
----------------
Net cash provided by investing activities 749,000
----------------
Cash flows from financing activities:
Net proceeds from sale of redeemable
convertible preferred stock and warrants 16,853,000
Proceeds from issuance of notes payable 1,800,000
Exercise of stock options 23,000
----------------
Net cash provided by financing activities 18,676,000
----------------
Net cash flows used in discontinued operations (911,000)
----------------
Net increase in cash and cash equivalents 5,971,000
Cash and cash equivalents at beginning of year 6,619,000
----------------
Cash and cash equivalents at end of year $ 12,590,000
================
Supplemental disclosures of noncash investing
and financing activities:
Cash paid for interest $ 16,000
Accretion on redeemable convertible preferred stock 7,909,000
Revaluation of deferred stock-based compensation
related to employee stock option forfeitures 223,000
Issuance of warrants for common stock 114,000
Issuance of warrants for redeemable convertible
preferred stock 1,278,000
Conversion of notes payable and accrued interest
to preferred stock and warrants 3,286,000
See accompanying notes to consolidated financial statements.
(1) Summary of Significant Accounting Policies
(a) Organization
MarketFirst Software, Inc. and its subsidiary (the Company) provide a
comprehensive software and hosted e-marketing solution that enables
organizations to execute interactive marketing campaigns over the
Internet. The MarketFirst solution is comprised of four core
components: an e-marketing software platform; software modules for
e-marketing campaigns called solutions; a hosted service; and
strategic e-marketing consulting and implementation services.
The Company was incorporated in Delaware on August 8, 1996, with
headquarters in Mountain View, California.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of
MarketFirst Software, Inc. and its wholly owned subsidiary. All
significant intercompany accounts and transactions have been
eliminated in consolidation.
(c) Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less when purchased to be cash
equivalents. As of December 31, 2001, cash equivalents consisted
solely of money market funds. The Company is exposed to credit risk in
the event of default by the financial institutions or the issuers of
these investments to the extent of the amounts recorded on the
consolidated balance sheets in excess of amounts that are insured by
the FDIC.
(d) Property and Equipment
Property and equipment are stated at cost. Depreciation is computed
using the straight-line method based on estimated useful lives of the
assets, generally two years for computer equipment and software and
five years for furniture and fixtures. Leasehold improvements are
amortized on a straight-line basis over the shorter of the lease term
or estimated useful life of the asset.
(e) Impairment of Long-Lived Assets
The Company reviews the recoverability of the carrying amount of its
long-lived assets whenever events or changes in circumstances indicate
that the carrying amount of an asset might not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered
to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the asset exceeds its fair
value.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-lived Assets," which supersedes SFAS
No. 121. The primary objectives of SFAS No. 144 are to develop one
accounting model based on the framework established in SFAS No. 121
for long-lived assets to be disposed of by sale, and to address
significant implementation issues identified after the issuance of
SFAS No. 121. The Company adopted the provisions of SFAS 144 effective
January 1, 2001. The adoption did not have a material impact on the
consolidated financial statements.
(f) Software Development Costs
The Company is required to capitalize costs related to internally
developed software for which technological feasibility has been
established but which has not been released. To date, software
development costs incurred subsequent to the establishment of
technological feasibility have not been material and thus have been
expensed as incurred.
(g) Stock-Based Compensation
The Company uses the intrinsic-value method prescribed in Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, to account for its employee stock-based compensation plans.
As such, compensation expense is recorded for stock options granted to
employees when the fair value of the underlying stock exceeds the
exercise price at the grant date. The Company amortizes deferred
stock-based compensation over the vesting period in accordance with
Financial Accounting Standards Board (FASB) Interpretation No. 28,
Accounting for Stock Appreciation Rights and Other Variable Stock
Option or Award Plans. Pursuant to Statement of Financial Accounting
Standard (SFAS) No. 123, Accounting for Stock-Based Compensation, the
Company discloses the pro forma effect of using the fair-value method
of accounting for stock-based compensation arrangements.
(h) Income Taxes
The Company uses the asset and liability method of accounting for
income taxes. Under the asset and liability method, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amount of existing assets and liabilities and their respective tax
basis and operating loss and tax credit carryforwards. A valuation
allowance is recorded to reduce deferred tax assets to an amount more
likely than not to be recovered.
(i) Revenue Recognition
The Company obtains revenue from software hosting services, software
license fees, and professional services, including consulting services
and maintenance and support. The Company accounts for software license
and maintenance and support fees in accordance with Statement of
Position (SOP) 97-2, Software Revenue Recognition, as amended by SOP
98-9. SOP 97-2, as amended, generally requires revenue earned on
software arrangements involving multiple elements to be allocated to
each element based on the relative fair value of the elements. The
fair value of consulting services and maintenance and support has been
determined based on the price charged when these elements are sold
separately. License revenue is recorded under the residual method
described in SOP 98-9 for arrangements in which licenses are sold with
these elements.
Revenue from license fees is recognized when persuasive evidence of an
arrangement exists, delivery of the product has occurred, acceptance
is certain, the fee is fixed or determinable, and collection is
probable. The Company's consulting services do not involve significant
production, customization, or modification of the Company's software
products. In situations where the Company is providing hosting,
software license revenue is only recognized if the customer has the
right to take possession of the software and host the application on
its own or with another hosting vendor without substantial cost or
penalty. If the customer does not have the right to take possession of
the software, then the fees related to the arrangement are deferred
and recognized ratably over the hosting term, typically 6 to 12
months. The Company earns additional fees when a customer exceeds a
specified usage limit. These fees are recorded in the period in which
the customer incurs the fee; however such fees have been immaterial to
date. Initial set-up fees are deferred and amortized over the hosting
term.
Software maintenance and support fees (which are recorded in
professional services) are recognized ratably over the term of the
maintenance and support period. Revenue from professional services
consists of consulting services and is comprised primarily of time and
materials arrangements. Revenue from professional services contracts
is recognized as services are rendered.
Deferred revenue includes amounts billed to customers for which
revenues have not been recognized and generally results from the
following: (1) deferred maintenance and support; (2) hosting set-up
fees; (3) consulting services not yet rendered; and (4) situations in
which collection is not considered probable at the outset of the
arrangement.
(j) Use of Estimates
The preparation of consolidated financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure
of contingent liabilities at the date of the consolidated financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
(k) Advertising Costs
The Company expenses all advertising costs as incurred. Advertising
expense was $324,000 for fiscal 2001.
(l) Comprehensive Loss
Accumulated other comprehensive loss, as presented in the accompanying
consolidated balance sheets, consists solely of cumulative foreign
currency translation adjustments.
(m) Concentrations of Credit Risk
The Company sells its products primarily to end users in North
America. The Company's customers provide goods and services in a
variety of industries. The Company performs ongoing evaluations of its
customers' financial condition and generally requires no collateral.
(n) Fair Value of Financial Instruments
The fair values of the Company's financial instruments, including cash
and cash equivalents, accounts receivable, and accounts payable
approximate their carrying values due to their short maturity.
(o) Foreign Currency Translation
The functional currency of the Company's foreign subsidiary is the
local currency. The Company translates the assets and liabilities of
its foreign subsidiary into U.S. dollars at the rates of exchange as
of the balance sheet date. Revenues and expenses are translated into
U.S. dollars at the average rate of exchange during each period.
Translation adjustments are included in other comprehensive loss.
Gains and losses resulting from foreign currency transactions
denominated in a currency other than the functional currency are
included in the statement of operations and have not been significant
to the Company's consolidated operating results in any period.
(2) Property and Equipment
A summary of property and equipment as of December 31, 2001 follows:
Computer equipment and software $ 2,636,000
Office furniture and equipment 880,000
Leasehold improvements 716,000
-----------
4,232,000
Less accumulated depreciation and amortization 2,413,000
-----------
$ 1,819,000
===========
The Company had no equipment under capital lease as of December 31, 2001.
(3) Accrued Liabilities
A summary of accrued liabilities as of December 31, 2001 follows:
Compensation and related benefits $ 1,318,000
Consulting and professional fees 167,000
Software royalties 525,000
Other 930,000
-----------
$ 2,940,000
===========
(4) Conversion of Notes Payable
In February 2001, a note payable, with principal and interest of $945,000,
was converted into 328,123 shares of Series E preferred stock and 172,921
warrants in accordance with the Series E preferred stock purchase
agreement. As described in note 6(b), the conversion of this note resulted
in an extraordinary loss of $404,000.
In May 2001, a note payable, with principal and interest of $526,000, was
converted into 1,625,064 shares of Series F preferred stock in accordance
with the Series F preferred stock purchase agreement.
(5) Long-Term Debt
Long-term debt as of December 31, 2001, consists of a note payable due to a
vendor in the principal amount of $150,000 bearing interest at 5% per
annum. Interest payments are due annually. Principal and any accrued and
unpaid interest are payable upon the earlier of June 14, 2003, or a firm
commitment underwritten public offering.
(6) Stockholders' Deficit
(a) Redeemable Convertible Preferred Stock and Warrants
Redeemable convertible preferred stock and warrants outstanding as of
December 31, 2001 are as follows:
Shares Issued and Liquidation Carrying
designated outstanding preference Value
------------ ------------- -------------- -----------
Series:
A 2,040,000 2,040,000 $ 102,000 $ 555,000
B 2,200,000 2,200,000 220,000 1,082,000
C 20,000,000 19,882,358 2,783,000 13,444,000
D 16,000,000 15,407,936 3,390,000 15,771,000
E 14,100,000 7,613,474 4,416,000 8,755,000
F 62,000,000 59,339,723 57,559,000 26,229,000
Warrants - - - 18,096,000
------------ ------------- -------------- ------------
116,340,000 106,483,491 $68,470,000 $83,932,000
============ ============= =============== ============
The rights, preferences, and privileges of the holders of Series A, B,
C, D, E, and F preferred stock are as follows:
o Dividends are noncumulative and payable only upon declaration by
the Company's Board of Directors at a rate of $0.0125, $0.025,
$0.034, $0.053, $0.144 and $0.026 per share for Series A, B, C,
D, E, and F preferred stock, respectively. If, after dividends in
the full preferential amount have been paid to the holders of
Series A, B, C, D, E and F preferred stock, the Board of
Directors declares additional dividends, then such additional
dividends shall be declared on the common and preferred stock on
a pro rata basis. No dividends shall be paid with respect to the
preferred stock unless the payment of such dividends and the
amount thereof has been approved by the holders of at least
two-thirds (2/3) of the shares of Series F preferred stock then
outstanding.
o The holders of Series A, B, C, D, E and F preferred stock have a
liquidation preference of $0.05, $0.10, $0.14, $0.22, $0.58 and
$0.97 per share, respectively, plus any declared but unpaid
dividends. The holder of each share of Series F preferred stock
is entitled to be paid prior and in preference to the holders of
Series A, B, C, D, and E preferred stock.
o Each share of preferred stock is convertible at any time into
common stock on a one-for-one basis, subject to certain
antidilution provisions. Each share of preferred stock
automatically converts upon the closing of a firm commitment
underwritten public offering pursuant to an effective
registration statement in which the public offering price is not
less than $30,000,000 in the aggregate, or upon receipt by the
Company of the written consent of both (A) holders of more than
50% of the outstanding shares of Series A, B, C, D, and E
preferred stock, voting together as a single class and on an as
converted basis, and (B) holders of at least two-thirds (2/3) of
the outstanding shares of the Series F preferred stock.
o The holders of preferred stock have voting rights equal to common
stock on an "as-if-converted" basis.
o If, at any time, the Company issues or sells shares of common
stock for an effective price that is less than the conversion
price for a series of preferred stock in effect immediately prior
to such issue or sale, then, and in each such case, the
conversion price for such series of preferred stock shall be
reduced in accordance with an agreed-upon formula.
o On or after May 25, 2004, the Company is required to redeem, upon
written notice from the holders of at least two-thirds (2/3) of
the issued and outstanding shares of Series F preferred stock,
all of the shares of Series F preferred stock outstanding. At any
time after May 25, 2004, the Company is required to redeem, at
the option of any holder of at least 1,000,000 shares of Series
A, B, C, D, and E preferred stock, all or any portion of the
holder's shares. The redemption price is equal to the liquidation
price plus all declared and unpaid dividends on the shares of
preferred stock.
(b) Note and Warrant Purchase Agreements
On July 11, 2000 and November 9, 2000, the Company signed and issued
$15,000,000 of convertible promissory notes to existing stockholders
under two separate note and warrant purchase agreements. The notes
bore interest at 9% per annum and were due within a year of the date
of issuance. The notes were convertible into shares upon the earliest
of the following conversion events:
o In a $10,000,000 private equity financing, the notes would
convert to the shares sold in the financing at the price per
share of the stock issued in the financing.
o In a $10,000,000 initial public offering (IPO), the notes would
convert to common stock at a price per share equal to 75% of the
mid-point of the filing range.
o In an acquisition, the shares would convert to common stock at a
price per share equal to 75% of the fair market value per share
of the consideration received in the acquisition.
Upon the occurrence of a conversion event set forth above, the
noteholders receive warrants for shares equal to 20% (coverage
percentage) of the notes outstanding divided by the conversion price
per share. The warrants are exercisable at $0.01 per share and have a
term of five years from the date of the respective agreements and the
coverage percentage would increase in 5% increments until a conversion
event occurred.
Under the Series E preferred stock purchase agreement, with the
purchase of each share of Series E redeemable convertible preferred
stock, stockholders receive a warrant to purchase an additional 0.527
shares of Series E preferred stock. The warrant is exercisable for
$0.01 per share and has a term of five years from the date of
issuance.
On April 9, 2001 and May 9, 2001, the Company signed and issued,
$1,800,000 of convertible promissory notes, to new and existing
shareholders under a note and warrant purchase agreement. The notes
bear interest at 9% per annum and were due within a year of the date
of issuance. Under the agreement, upon the closing of a $13,000,000
private equity financing or an acquisition (as defined in the
agreement), whichever occurs first, noteholders receive warrants for
shares equal to 20% (coverage percentage) of the notes outstanding
divided by the conversion price per share. The warrants are
exercisable at $0.01 per share and have a term of five years form the
date of the agreement.
In May and August 2001, the Company closed its Series F preferred
stock round of financing. In total, the Company issued 59,339,723
shares of Series F redeemable convertible preferred stock and
1,731,286 warrants for Series F preferred stock in exchange for cash
of $16,853,000 and conversion of notes payable and accrued interest of
$2,341,000. The Company has recorded $7.8 million of accretion expense
to reflect the current redemption value.
(c) Warrants
On September 15, 1999, the Company issued a warrant in exchange for
services provided in connection with the Company's Series D preferred
stock financing. The warrant entitles the holder to purchase up to
301,719 shares of the Company's Series D preferred stock at a price of
$1.065 per share. The warrant must be exercised before the earliest to
occur of (a) the closing of an acquisition of the Company; (b) the
closing of the Company's IPO; or (c) the expiration date of September
15, 2004. The $183,000 fair value of the warrants issued was
calculated using the Black-Scholes option-pricing model, using $1.065
as the fair value of the underlying redeemable convertible preferred
stock, and the following assumptions: no dividends; contractual life
of five years; risk-free interest rate of 5.94%; expected volatility
of 60%. This amount has been recorded as the warrant value and has
been periodically accreted to the carrying value of redeemable
convertible preferred stock so that the carrying value of preferred
stock equaled its redemption value on December 31, 2001.
On December 19, 2000, the Company issued warrants in connection with
the Company's Series E preferred stock financing. The warrants entitle
the Series E preferred stockholders to purchase up to 6,000,758 shares
of the Company's Series E preferred stock at a price of $0.01 per
share. The warrants expire on December 19, 2005. The $16,117,000 fair
value of the warrants was calculated using the Black-Scholes
option-pricing model, using $1.89 as the fair value of the underlying
redeemable convertible preferred stock, and the following assumptions:
no dividends; contractual life of five years; risk-free interest rate
of 6.5%; and expected volatility of 70%.
On February 16, 2001, the Company issued warrants in connection with
the Company's Series E preferred stock financing. The warrants entitle
the Series E preferred stockholders to purchase up to 387,207 shares
of the Company's Series E preferred stock at a price of $0.01 per
share. The warrants expire on February 16, 2006. The $729,000 fair
value of the warrants was calculated using the Black-Scholes
option-pricing model, using $1.89 as the fair value of the underlying
redeemable convertible preferred stock, and the following assumptions:
no dividends; contractual life of five years; risk-free interest rate
of 5.09%; and expected volatility of 95%. As described in note 6(b)
the fair value was used to determine the extraordinary loss on the
extinguishment of debt.
On May 25, 2001, in connection with the close of Series F preferred
stock financing as described in note 6(b), the Company issued warrants
in accordance with the Company's note and warrant purchase agreement
dated April 9, 2001, as amended on May 9, 2001. The warrants entitle
the noteholders to purchase up to 1,731,286 shares of the Company's
Series F preferred stock at a price of $0.01 per share. The warrants
expire on May 25, 2006. The $549,000 fair value of the warrants was
calculated using the Black-Scholes option-pricing model, using $0.32
as the fair value of the underlying redeemable convertible preferred
stock, and the following assumptions: no dividends; contractual life
of five years; risk-free interest rate of 5.49%; and expected
volatility of 95%. The fair value was accounted for as a reduction in
the carrying value of the Series F preferred stock.
On June 14, 2001, the Company issued fully vested purchase warrants to
a vendor. The warrants entitle the vendor to purchase 25,000 shares of
common stock at an exercise price of $0.01 per share. The warrants
expire on June 14, 2006. The $114,000 fair value of the warrants was
calculated using the Black-Scholes option-pricing model, using $0.30
as the fair value of the underlying common stock, and the following
assumptions: no dividends; contractual life of five years; risk-free
interest rate of 5.22%; and expected volatility of 95%. The fair value
was recorded as issuance costs of Series E preferred stock.
(d) 1996 Equity Incentive Plan
In 1996, the Company adopted the 1996 Equity Incentive Plan (the
Plan), as amended on June 8, 2001, pursuant to which incentive stock
options and nonstatutory stock options may be granted to employees and
consultants of the Company. The exercise price for incentive stock
options is at least 100% of the fair market value on the date of grant
for employees owning less than 10% of the voting power of all classes
of
stock and at least 110% of the fair market value on the date of grant
for employees owning more than 10% of the voting power of all classes
of stock. For nonstatutory stock options, the exercise price is at
least 110% of the fair market value on the date of grant for employees
owning more than 10% of the voting power of all classes of stock and
at least 85% for employees owning less than 10% of the voting power of
all classes of stock. Options generally expire in 10 years; however,
they may be limited to 5 years if the optionee owns stock representing
more than 10% of the Company. Vesting periods are determined by the
Company's Board of Directors and generally provide for ratable vesting
over 4 years. As of December 31, 2001, 20,636,170 shares of common
stock were reserved for issuance under the Plan, and 9,837,678 shares
were available for grants.
(e) Stock-Based Compensation
The Company uses the intrinsic-value method in accounting for its
employee stock-based compensation plans. Accordingly, no compensation
cost has been recognized for any of its stock options granted or
restricted stock sold because the exercise price of each option or
purchase price of each share of restricted stock equaled or exceeded
the fair value of the underlying common stock as of the grant date for
each stock option or purchase price of each restricted stock share,
except for 860,800 shares of restricted stock sold in 1997 and stock
options granted from January 1, 1999 through December 31, 2000. With
respect to the stock options granted from January 1, 1999 to December
31, 2000, the Company recorded deferred stock compensation of
$10,705,000 for the difference at the grant or issuance date between
the exercise price of each stock option granted and the fair value of
the underlying common stock. This amount is being amortized on an
accelerated basis over the vesting period, generally four years,
consistent with the method described in FASB Interpretation No. 28.
Amortization of the December 31, 2001, balance of deferred stock-based
compensation for fiscal 2002, 2003, and 2004 would approximate
$955,000, $305,000, and $8,000, respectively.
Had compensation cost been determined in accordance with SFAS No. 123
for the Company's stock-based compensation plan and net loss for the
year ended December 31, 2001 would have been as follows:
As reported $ 24,133,000
Pro forma 27,521,000
The weighted-average estimated fair value of employee stock options
granted during fiscal 2001, with exercise prices equivalent to the
market price of the Company's common stock at the date of grant was
$0.05 per share.
The fair value of each option was estimated on the date of grant using
the minimum-value method of the Black-Scholes model for the year ended
December 31, 2001, with the following weighted-average assumptions: no
dividends; risk-free interest rate of 4.75%; and expected life of 3.5
years.
(f) Restricted Common Stock and Stock Options
The Company has 575,740, 167,055, and 37,500 additional shares of
restricted stock outstanding subject to repurchase at $0.18, $0.50,
and $2.88, respectively, per share as of December 31, 2001. These
shares were sold to officers in 1998 and 2000, at fair value, and vest
over a four-year period.
Stock option activity is presented below:
Weighted
Average
Number of Exercise
options Price
----------- -------------
Outstanding, beginning of year 6,117,233 $ 3.24
Granted 9,562,278 0.04
Exercised (70,756) 0.33
Canceled (7,547,729) 1.70
-----------
Outstanding, end of year 8,061,026 0.91
===========
Exercisable, end of year 2,318,644 1.10
===========
Information regarding the stock options outstanding as of December 31, 2001
is summarized below:
Options outstanding Options exercisable
--------------------------------------- ---------------------------
Weighted-
average Weighted Weighted
Number of remaining average Number average
Exercise Options contractual exercise of exercise
prices outstanding life (years) price options price
-------- ------------- ------------ ----------- ------------- -------------
$ 0.03 5,802,012 9.48 $ 0.03 1,328,699 $ 0.03
0.06 45,318 5.87 0.06 45,318 0.06
0.13 20,750 5.94 0.13 20,750 0.13
0.18 677,619 7.30 0.18 409,254 0.18
0.50 106,729 8.04 0.50 54,176 0.50
1.78 872,258 8.96 1.78 252,700 1.78
2.00 26,000 8.07 2.00 12,457 2.00
2.88 60,200 8.23 2.88 34,775 2.88
11.48 450,140 8.58 11.48 160,515 11.48
------------- -------------
8,061,026 9.13 0.91 2,318,644 1.10
============= =============
(7) Lease Commitments
The Company leases its facilities under operating leases that expire at
various dates through 2007. Minimum rental commitments under all
noncancelable leases with an initial term in excess of one year are payable
as follows:
Years ending Operating
December 31, Leases
------------------------- ---------------------
2002 $ 3,885,000
2003 3,881,000
2004 3,168,000
2005 2,875,000
2006 2,954,000
Thereafter 744,000
---------------------
Total minimum lease payments 17,507,000
Less minimum sublease income 493,000
---------------------
Net minimum lease payments $ 17,014,000
=====================
Operating lease rental expense for the year from continuing operations:
Minimum rentals $ 3,848,000
Sublease income (2,363,000)
---------------------
Net rental expense $ 1,485,000
=====================
During fiscal 2000, the Company invested $1,249,000 in a certificate of
deposit as security for a letter of credit issued to a lessor in connection
with a facility lease agreement. This letter of credit expires on March 31,
2006. Accordingly, this restricted cash amount has been included in other
long-term assets as of December 31, 2001.
A third party subleases office space at the Company's headquarters. The
sublease term is from June 30, 2000 through March 31, 2002. Monthly rent is
$161,000 per month until April 1, 2001 and $164,000 per month thereafter.
(8) Related Party Transaction
During fiscal year 2001, the Company recognized revenue on sales of
software licenses and professional services to a stockholder in the amount
of $344,000.
(9) Income Taxes
The Company has not recognized income tax expense for the year ended
December 31, 2001. The Company's pretax loss from operations for the year
ended consisted of a loss of $21,799,000 and $662,000 from domestic and
foreign locations respectively.
The reconciliation of the Company's income tax expense for the year ended
December 31, 2001, to the tax benefit computed using the federal statutory
rate of 35% is as follows:
Federal income tax benefit at the statutory rate $ (7,862,000)
Deferred stock-based compensation 717,000
State taxes, net of federal benefit (701,000)
Change in valuation allowance 8,562,000
Other (683,000)
-------------
$ -
=============
As of December 31, 2001 the types of temporary differences that give rise
to deferred tax assets and liabilities are set forth below:
Deferred tax assets:
Accruals and reserves $ 2,112,000
Depreciation and amortization 345,000
Net operating loss and credit carryforwards 23,604,000
------------
Gross deferred tax assets 26,061,000
Valuation allowance (26,061,000)
------------
Total deferred tax assets $ -
============
Management has established a valuation allowance for the portion of
deferred tax assets for which realization is uncertain. The net change in
the total valuation allowance for deferred tax assets for the year ended
December 31, 2001 was $8,562,000.
As of December 31, 2001, the Company has net operating loss carryforwards
for federal and California income tax purposes of approximately $60,130,000
and $29,934,000, respectively, available to reduce future income subject to
income taxes. The federal net operating loss carryforwards expire beginning
in 2011 and 2021. The California net operating loss carryforwards expire
beginning in 2003 through 2010.
As of December 31, 2001 the Company has research and other credit
carryforwards for federal and California income tax purposes of
approximately $519,000 and $480,000, respectively, available to reduce
future income taxes. The federal research credit carryforwards expire in
2021.
The Internal Revenue Service code of 1986 substantially restricts the
ability of a corporation to utilize existing net operating losses in the
event of an "ownership change" of the Company. If such ownership changes
occur, utilization of the net operating losses will be subject to an annual
limitation in future years.
(10) Restructuring and Other Charges
Asset
Impairments
and Loss on
Sale of Severance
Certain and Abandonment
Assets Benefits Charges Total
------------ ------------ ------------- -------------
Balance as of December 31, 2000 $ - $ - $ - $ -
Net charge to operating expense 1,372,000 212,000 3,933,000 5,517,000
Cash paid - (212,000) - (212,000)
Asset impairment and loss on sale
of certain assets applied (1,372,000) - - (1,372,000)
------------ ------------ ------------- -------------
Balance as of December 31, 2001 $ - $ - $ 3,933,000 $ 3,933,000
============ =========== ============= =============
In May 2001, the Company implemented a restructuring plan that included a
reduction in headcount of 20 employees, and the outsourcing of hosting
operations to a third party vendor. The Company recorded $212,000 in
termination related benefits associated with its restructuring plan. All of
these termination related benefits were paid during 2001.
In September 2001, in connection with the sale of FusionDM, the Company
recorded lease abandonment costs of $1,081,000 for the leased facilities
not sold to the third party. These costs include the remaining lease
liabilities and brokerage fees stated at actual cost reduced by estimated
sublease income.
In December 2001, the Company recorded lease abandonment costs of
$3,933,000 related to the abandonment of its facilities in Mountain View,
California and San Francisco, California. These costs include remaining
lease liabilities and brokerage fees stated at actual cost reduced by
estimated sublease income. The estimated costs of abandoning these leased
facilities, including estimated costs to sublease, were based on market
information trend analyses. Actual future cash requirements and lease
abandonment costs may differ materially from the accrual as of December 31,
2001, particularly if actual sublease income is significantly different
from current estimates. In addition, the Company recorded $1,027,000 to
write-off abandoned leasehold improvements and furniture related to the
abandoned leased facilities noted above and a $345,000 loss on the sale of
computer equipment related to the outsourcing of hosting operations to a
third party vendor.
(11) Discontinued Operations
On September 24, 2001, the Company sold certain assets and liabilities of
its subsidiary, FusionDM, Inc., to a third party in exchange for $1,500,000
in cash and future earnouts. The operations of FusionDM ceased on September
24, 2001 and have been segregated and reported as discontinued operations.
The loss from operations of FusionDM up to June 26, 2001 (measurement date)
was $80,000. The measurement date was determined at the date that the
Company's management formally committed to selling FusionDM. The loss on
disposal of FusionDM was $1,188,000 and consisted of the carrying value of
net assets in excess of the $1,500,000 proceeds from the sale of FusionDM,
expenses related to the sale, and an operating loss of $666,000 for the
period June 26, 2001 to September 24, 2001.
(12) Segment Information
The Company has adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS No. 131 establishes standards for
reporting information about operating segments. Operating segments are
defined as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance.
The Company operates in one segment, Internet marketing solutions. The
Company markets its products in the United States and in foreign countries
through its direct sales force. The Company's chief operating decision
maker evaluates resource allocation decisions and the performance of the
Company based upon the Company's performance on a consolidated basis and
does not receive financial information about expense allocations on a
disaggregated basis by product or customer location.
2001
----
Revenues:
United States............................. $11,688,000
International............................. 904,000
-----------
Total................................... $12,592,000
===========
All of the Company's long lived assets are in the United States.
During the year ended December 31, 2001, no single customer accounted for
more than 10% of total revenues. The international revenues were derived
primarily from sales in Belgium, Germany, Netherlands, Sweden and England.
(13) Subsequent Events
On October 2, 2002, the shareholders of the Company signed an agreement to
sell their shares in the Company to a wholly-owned subsidiary of Pivotal
Corporation, a British Columbia, Canada, corporation. The transaction
closed on October 23, 2002.
MARKETFIRST SOFTWARE, INC.
AND SUBSIDIARY
Condensed Consolidated Financial Statements
(Unaudited)
MARKETFIRST SOFTWARE, INC.
AND SUBSIDIARY
Condensed Consolidated Balance Sheets
September 30, 2002 and December 31, 2001
(Unaudited)
September 30, December 31,
Assets 2002 2001
--------------- --------------
Current assets:
Cash and cash equivalents $ 3,535,000 $ 12,590,000
Accounts receivable 1,373,000 2,163,000
Prepaid expenses and other 738,000 525,000
--------------- --------------
Total current assets 5,646,000 15,278,000
Property and equipment, net 1,417,000 1,819,000
Deposits and other assets 97,000 1,354,000
--------------- --------------
Total assets $ 7,160,000 $ 18,451,000
=============== ==============
Liabilities, Redeemable Convertible
Preferred Stock and Warrants, and Stockholders'
Deficit
Current liabilities:
Accounts payable 987,000 1,320,000
Accrued liabilities 1,930,000 2,940,000
Restructuring liabilities 1,349,000 3,933,000
Other Liabilities -- 1,080,000
Deferred revenue 1,502,000 1,754,000
--------------- --------------
Total current liabilities 5,768,000 11,027,000
Long-term debt 150,000 150,000
--------------- --------------
Total liabilities 5,918,000 11,177,000
--------------- --------------
Commitments
Redeemable convertible preferred
stock and warrants 93,698,000 83,932,000
Stockholders' deficit:
Common stock 6,000 6,000
Additional paid-in capital 18,850,000 18,850,000
Deferred stock-based compensation ( 480,000) (1,268,000)
Notes receivable from stockholders -- (164,000)
Accumulated other comprehensive loss (14,000) (13,000)
Accumulated deficit (110,818,000) (94,069,000)
--------------- --------------
Total stockholders' deficit (92,456,000) (76,658,000)
--------------- --------------
Total liabilities, redeemable
convertible preferred stock
and warrants and stockholders'
deficit $ 7,160,000 $ 18,451,000
=============== ===============
See accompanying notes to condensed consolidated financial statements.
MARKETFIRST SOFTWARE, INC.
AND SUBSIDIARY
Condensed Consolidated Statements of Operations
For the nine months ended September 30, 2002 and September 30, 2001
(Unaudited)
2002 2001
---------------- --------------
Revenues:
Hosting $ 1,758,000 $ 3,511,000
Licenses 1,711,000 3,191,000
Professional services 3,021,000 2,796,000
---------------- --------------
Total revenues 6,490,000 9,498,000
---------------- --------------
Cost of revenues:
Hosting 1,227,000 2,059,000
Licenses 174,000 433,000
Professional services 1,672,000 2,361,000
Stock-based compensation 196,000 372,000
---------------- --------------
Total cost of revenues 3,269,000 5,225,000
---------------- --------------
Gross profit 3,221,000 4,273,000
---------------- --------------
Operating expenses:
Research and development 2,907,000 3,609,000
Sales and marketing 4,673,000 10,712,000
General and administrative 1,270,000 3,269,000
Stock-based compensation 591,000 1,459,000
Restructuring charges 824,000 558,000
---------------- --------------
Total operating expenses 10,265,000 19,607,000
---------------- --------------
Operating loss (7,044,000) (15,334,000)
Interest and other income (expense), net 86,000 26,000
---------------- --------------
Net loss before extraordinary item (6,958,000) (15,308,000)
Extraordinary item -- (404,000)
---------------- --------------
Net loss before discontinued operations (6,958,000) (15,712,000)
---------------- --------------
Discontinued operations:
Loss from operations of FusionDM -- (80,000)
Loss on disposal of FusionDM -- (1,188,000)
---------------- --------------
Net loss (6,958,000) (16,980,000)
Accretion on redeemable convertible
preferred stock (9,791,000) (4,595,000)
---------------- --------------
Net loss attributable to common
stockholders $ (16,749,000) $ (21,575,000)
================ ==============
See accompanying notes to condensed consolidated financial statements.
MARKETFIRST SOFTWARE, INC.
AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows
For the nine months ended September 30, 2002
and September 30, 2001
(Unaudited)
2002 2001
----------------- ---------------
Cash flows from operating activities:
Net loss $ (6,958,000) $ (16,980,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Loss from operations of FusionDM -- 80,000
Loss on disposed FusionDM -- 842,000
Provision for allowance for bad debts (247,000) --
Depreciation and amortization 460,000 1,244,000
Restructuring charges 824,000 445,000
Amortization of stock-based compensation 787,000 1,831,000
Loss from sales of property and equipment -- 359,000
Extraordinary loss from extinguishments of debts -- 404,000
Changes in operating assets and liabilities:
Accounts receivable 1,037,000 298,000
Other assets 7,000 (192,000)
Restructuring liability (3,148,000) --
Other liabilities (1,080,000) --
Prepaid expenses and other assets (213,000) 207,000
Accounts payable and accrued liabilities (1,477,000) 289,000
Deferred revenue (252,000) 241,000
----------------- ---------------
Net cash used in operating activities (10,260,000) (10,932,000)
----------------- ---------------
Cash flows from investing activities:
Purchase of property and equipment (58,000) (492,000)
Proceeds from sale of discontinued operations -- 1,500,000
Deposits and other assets 1,250,000 (305,000)
----------------- ---------------
Net cash (used in) provided by investing activities 1,192,000 703,000
----------------- ---------------
Cash flows from financing activities:
Net proceeds from sale of redeemable convertible preferred stock and warrants -- 16,853,000
Proceeds from issuance of notes payable -- 1,950,000
Repayment of stockholder notes receivable 9,000 --
Exercise of stock options 4,000 17,000
----------------- ---------------
Net cash provided by financing activities 13,000 18,820,000
----------------- ---------------
Net cash flows used in discontinued operations -- (911,000)
----------------- ---------------
Net (decrease) increase in cash and cash equivalents (9,055,000) 7,680,000
Cash and cash equivalents at beginning of year 12,590,000 6,619,000
----------------- ---------------
Cash and cash equivalents at end of year $ 3,535,000 $ 14,299,000
================= ===============
See accompanying notes to condensed consolidated financial statements.
Notes to the Condensed Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
(a) Organization
MarketFirst Software, Inc. and its subsidiary (the Company) provide a
comprehensive software and hosted e-marketing solution that enables
organizations to execute interactive marketing campaigns over the Internet.
The MarketFirst solution is comprised of four core components: an
e-marketing software platform; software modules for e-marketing campaigns
called solutions; a hosted service; and strategic e-marketing consulting
and implementation services.
The Company was incorporated in Delaware on August 8, 1996, with
headquarters in Mountain View, California.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of MarketFirst
Software, Inc. and its wholly owned subsidiary. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
(c) Revenue Recognition
The Company obtains revenue from software hosting services, software
license fees, and professional services, including consulting services and
maintenance and support. The Company accounts for software license and
maintenance and support fees in accordance with Statement of Position (SOP)
97-2, Software Revenue Recognition, as amended by SOP 98-9. SOP 97-2, as
amended, generally requires revenue earned on software arrangements
involving multiple elements to be allocated to each element based on the
relative fair value of the elements. The fair value of consulting services
and maintenance and support has been determined based on the price charged
when these elements are sold separately. License revenue is recorded under
the residual method described in SOP 98-9 for arrangements in which
licenses are sold with these elements.
Revenue from license fees is recognized when persuasive evidence of an
arrangement exists, delivery of the product has occurred, acceptance is
certain, the fee is fixed or determinable, and collection is probable. The
Company's consulting services do not involve significant production,
customization, or modification of the Company's software products. In
situations where the Company is providing hosting, software license revenue
is only recognized if the customer has the right to take possession of the
software and host the application on its own or with another hosting vendor
without substantial cost or penalty. If the customer does not have the
right to take possession of the software, then the fees related to the
arrangement are deferred and recognized ratably over the hosting term,
typically 6 to 12 months. The Company earns additional fees when a customer
exceeds a specified usage limit. These fees are recorded in the period in
which the customer incurs the fee; however such fees have been immaterial
to date. Initial set-up fees are deferred and amortized over the hosting
term.
Software maintenance and support fees (which are recorded in professional
services) are recognized ratably over the term of the maintenance and
support period. Revenue from professional services consists of consulting
services and is comprised primarily of time and materials arrangements.
Revenue from professional services contracts is recognized as services are
rendered.
Deferred revenue includes amounts billed to customers for which revenues
have not been recognized and generally results from the following: (1)
deferred maintenance and support; (2) hosting set-up fees; (3) consulting
services not yet rendered; and (4) situations in which collection is not
considered probable at the outset of the arrangement.
Notes to the Condensed Consolidated Financial Statements
(2) Related Party Transaction
During the nine months ended September 30, 2002 and nine months ended
September 30, 2001, the Company recognized revenue on sales of software
licenses and professional services to a stockholder in the amount of
$383,000 and $212,000, respectively.
(3) Restructuring
Lease
Severance and Abandonment
Benefits Charges Total
------------------ ------------------ ----------------
Balance as of December 31, 2001 $ - 3,933,000 3,933,000
Net charge to operating expense 668,000 156,000 824,000
Cash paid (436,000) (1,723,000) (2,159,000)
Reclassification of lessee deposits - (1,249,000) (1,249,000)
------------------ ------------------ ----------------
Balance as of September 30, 2002 $ 232,000 1,117,000 1,349,000
================== ================== ================
During February and July 2002, the Company further reduced its headcount to
align its expenses and revenue levels. The Company's actions resulted in
severance and benefits charges of $668,000 for the CEO and 30 employees. At
September 30, 2002, the Company expects the remaining cash expenditures
will be made by April 2003.
In conjunction with the head count reductions, the Company evaluated the
facility needs for the remaining employees. The Company was able to
negotiate a settlement with its landlord that required the Company to
surrender certain lease deposits as well as a one time settlement payment.
An additional restructuring charge of $156,000 was recorded for this
settlement.
(4) Discontinued Operations
On September 24, 2001, the Company sold certain assets and liabilities of
its subsidiary, FusionDM, Inc., to a third party in exchange for $1,500,000
in cash and future earnouts. The operations of FusionDM ceased on September
24, 2001 and have been segregated and reported as discontinued operations.
At December 31, 2000, the value of FusionDM's assets and liabilities that
was included in net assets of discontinued operations on the balance sheet
was $5,766,000 and $4,354,000 respectively. The loss from operations of
FusionDM up to June 26, 2001 (measurement date) was $80,000. The
measurement date was determined as the date that the Company's management
formally committed to selling Fusion DM. The loss on disposal of FusionDM
was $1,188,000 and consisted of the carrying value of net assets in excess
of the $1,500,000 proceeds from the sale of FusionDM, expenses related to
the sale, and an operating loss of $666,000 for the period June 26, 2001 to
September 24, 2001.
(5) Subsequent Events
On October 2, 2002, the shareholders of the Company signed an agreement to
sell their shares in the Company to a wholly-owned subsidiary of Pivotal
Corporation, a British Columbia, Canada, corporation. The transaction
closed on October 23, 2002.
PIVOTAL CORPORATION
PRO FORMA CONDENSED COMBINED BALANCE SHEET
(Expressed in United States dollars.
All amounts in thousands except per share data)
(Unaudited)
September 30, 2002
-----------------------------------------------------
Historical Historical Pro Forma Pro Forma
Pivotal MarketFirst Adjustments Combined
----------- ------------ ----------- ---------
ASSETS
Current Assets
Cash and cash equivalents 15,781 310 (265)(a) 15,826
Short-term investments 14,505 3,225 17,730
Restricted cash 1,477 - 1,477
Accounts receivable 8,007 1,373 1,233 (b) 10,613
Prepaid expenses and other 2,945 738 (675)(b) 3,008
----------- ------------ ------- ---------
Total current assets 42,715 5,646 293 48,654
Property and equipment, net 3,783 1,417 (1,309)(b) 3,891
Goodwill 7,308 - 3,549 (c) 10,857
Acquired intangibles 236 - 236
Other assets 1,587 97 1,684
----------- ------------ ------- ---------
Total assets 55,629 7,160 2,533 65,322
=========== ============ ======= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued liabilities 13,707 2,917 3,456(b) 20,080
Current portion of accrued restructuring costs 1,554 1,349 2,903
Deferred revenue 10,926 1,502 12,428
Current portion of obligations under capital
leases and long-term debt 328 - 328
----------- ------------ ------- ---------
Total current liabilities 26,515 5,768 3,456 35,739
Non-current portion of accrued restructuring costs 2,851 - 2,851
Non-current portion of obligations under capital
leases and long-term debt 143 150 293
----------- ------------ ------- ---------
Total liabilities 29,509 5,918 3,456 38,883
Shareholders' equity 26,120 1,242 (923)(a),(d) 26,439
----------- ------------ ------- ---------
Total liabilities and shareholders' equity 55,629 7,160 2,533 65,322
=========== ============ ======= =========
See notes to unaudited pro forma condensed combined financial statements.
PIVOTAL CORPORATION
PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
(Expressed in United States dollars. All amounts in thousands except per share data)
(Unaudited)
Three months ended September 30, 2002
-----------------------------------------------------------------
Historical Historical Pro Forma Pro Forma
Pivotal MarketFirst Adjustments Combined
------------ ------------ ----------- ----------
Revenues:
License 3,215 167 3,382
Services and maintenance 9,092 1,430 10,522
------------ ------------ ----------- ----------
Total revenues 12,307 1,597 - 13,904
------------ ------------ ----------- ----------
Cost of revenues:
License 247 115 362
Services and maintenance 5,346 838 6,184
Stock based compensation - 53 53
------------ ------------ ----------- ----------
Total cost of revenues 5,593 1,006 - 6,599
------------ ------------ ----------- ----------
Gross profit 6,714 591 - 7,305
------------ ------------ ----------- ----------
Operating expenses:
Sales and marketing 9,056 1,384 10,440
Research and development 3,991 629 4,620
General and administrative 2,030 563 2,593
Restructuring costs and other charges - (420) (420)
Stock based compensation - 159 159
Amortization of goodwill and intangible
assets - - -
------------ ------------ ----------- ----------
Total operating expenses 15,077 2,315 - 17,392
------------ ------------ ----------- ----------
Loss from operations (8,363) (1,724) - (10,087)
Interest and other income (loss) (289) 14 (275)
------------ ------------ ----------- ----------
Loss before income taxes (8,652) (1,710) - (10,362)
Income taxes 163 - - 163
------------ ------------ ----------- ----------
Loss from continuing operations (8,815) (1,710) - (10,525)
============ ============ =========== ==========
Loss from continuing operations per share:
Basic and diluted (0.36) (0.42)
Weighted average number of shares used
to calculate loss from continuing operations
per share:
Basic and diluted 24,316 725 (a) 25,041
See notes to unaudited pro forma condensed combined financial statements.
PIVOTAL CORPORATION
PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
(Expressed in United States dollars. All amounts in thousands except per share data)
(Unaudited)
Year ended June 30, 2002
-----------------------------------------------------------------
Historical Historical Pro Forma Pro Forma
Pivotal MarketFirst Adjustments Combined
------------ ------------ ----------- ----------
Revenues:
License 29,282 4,324 33,606
Services and maintenance 40,334 6,698 47,032
------------ ------------ ----------- ----------
Total revenues 69,616 11,022 - 80,638
------------ ------------ ----------- ----------
Cost of revenues:
License 1,956 416 2,372
Services and maintenance 22,331 4,558 26,889
Stock based compensation - 339 339
------------ ------------ ----------- ----------
Total cost of revenues 24,287 5,313 - 29,600
------------ ------------ ----------- ----------
Gross profit 45,329 5,709 - 51,038
------------ ------------ ----------- ----------
Operating expenses:
Sales and marketing 41,417 8,947 50,364
Research and development 16,963 4,520 21,483
General and administrative 12,820 3,431 16,251
Restructuring costs and other charges 53,576 5,561 59,137
Stock based compensation - 918 918
Amortization of goodwill and intangible assets 16,157 - 16,157
------------ ------------ ----------- ----------
Total operating expenses 140,933 23,377 - 164,310
------------ ------------ ----------- ----------
Loss from operations (95,604) (17,668) - (113,272)
Interest and other income (loss) 45 (81) (36)
------------ ------------ ----------- ----------
Loss before income taxes (95,559) (17,749) - (113,308)
Income taxes 386 - - 386
------------ ------------ ----------- ----------
Loss from continuing operations (95,945) (17,749) - (113,694)
============ ============ =========== ==========
Loss from continuing operations per share:
Basic and diluted (3.99) (4.59)
Weighted average number of shares used to
calculate loss from continuing operations
per share:
Basic and diluted 24,039 725 (a) 24,764
See notes to unaudited pro forma condensed combined financial statements.
PIVOTAL CORPORATION
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(EXPRESSED IN UNITED STATES DOLLARS; ALL AMOUNTS IN THOUSANDS
EXCEPT PER SHARE DATA)
(UNAUDITED)
1. Basis of Presentation
The following unaudited pro forma condensed combined financial statements
give effect to the acquisition of MarketFirst Software, Inc.
("MarketFirst") by Pivotal Corporation ("Pivotal"). On October 23, 2002,
Pivotal completed the merger of an indirect wholly-owned subsidiary of
Pivotal, Pivotal Merger Subsidiary, Inc., a Delaware corporation, with and
into MarketFirst Software, Inc., a Delaware corporation. As such,
MarketFirst Software, Inc. became an indirect wholly-owned subsidiary of
Pivotal Corporation. The merger consideration was 725 shares of common
stock of Pivotal with a total fair value of $319 and cash of $265, which
included $55 that was paid to certain management employees of MarketFirst
Software, Inc. in satisfaction of rights to which they were entitled upon
the change of control effected by the merger, and acquisition related
expenditures of $210.
The pro forma condensed combined balance sheet assumes the acquisition took
place on September 30, 2002 and combines the September 30, 2002 balance
sheets of Pivotal and MarketFirst. The pro forma condensed combined
statement of operations for the fiscal year ended June 30, 2002 and for the
three months ended September 30, 2002 assumes that the acquisition took
place as of July 1, 2001. The pro forma condensed combined statement of
operations for the year ended June 30, 2002 combines the historical results
of Pivotal for the fiscal year ended June 30, 2002 with the historical
results of MarketFirst for the twelve months ended June 30, 2002. The pro
forma combined statements of operations for the three months ended
September 30, 2002 combines the historical results of Pivotal and
MarketFirst for the three months ended September 30, 2002. Since the fiscal
years of Pivotal and MarketFirst differ, the financial statements of
MarketFirst have been recast to match the fiscal year of Pivotal and are
presented for the twelve months period ended June 30, 2002.
The unaudited pro forma condensed combined balance sheet reflects the
appropriate pro forma adjustments (as described in note 2) to record the
acquisition of MarketFirst using the purchase method of accounting.
Acquisition costs and preliminary allocation of the excess of acquisition
costs over net assets acquired are set forth below:
Fair value of common shares of Pivotal issued $ 319
Cash bonus to certain management of MarketFirst 55
Cash acquisition related expenditures 210
---------
Total acquisition costs 584
Excess of liabilities assumed net tangible assets acquired 2,965
---------
Excess of acquisition costs over net assets acquired 3,549
=========
Allocated to:
Goodwill $ 3,549
=========
The fair value of the shares of Pivotal common stock was determined by
taking an average of the opening and closing price of Pivotal common stock
for a short period just before and just after the terms of the transaction
were agreed to by the parties and announced to the public.
The excess of acquisition costs over net assets acquired has been allocated
to goodwill. In accordance with Statement of Financial Accounting Standard
No. 142 (SFAS 142), "Goodwill and Other Intangible Assets", goodwill will
be allocated to, and assessed as part of, a reporting unit and will be
subject to impairment tests at least annually.
The pro forma combined financial statements included herein have been
prepared by Pivotal, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and footnote
disclosures normally prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules
and regulations. However, Pivotal believes that the disclosures are
adequate to make the information not misleading. These pro forma combined
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in Pivotal's Form 10-K for
the year ended June 30, 2002, the consolidated financial statements and
notes thereto included in Pivotal's Form 10-Q for the three months ended
September 30, 2002 and the financial statements of MarketFirst included in
this filing.
2. Pro Forma Adjustments
The pro forma condensed combined balance sheet reflects the following
adjustments:
(a) To record the acquisition of MarketFirst by the issuance of 725 shares
of Pivotal common stock with a fair value of $319 and payment of $265
cash.
(b) Adjustments to reflect fair values on acquisition.
(c) To record goodwill acquired.
(d) To eliminate share capital, additional paid-in capital, deferred stock
based compensation and accumulated deficit of MarketFirst.
The pro forma combined statements of operations reflect the following
adjustment:
(a) To record the acquisition of MarketFirst by the issuance of 725 shares
of Pivotal common stock.
3. Loss Per Share
Basic and diluted net loss per share for each period is calculated by
dividing pro forma net loss by the shares used to calculate net loss per
share in the historical period plus the effect of the 725 shares of
Pivotal's common stock that were exchanged for all issued and outstanding
shares of MarketFirst.
(c) Exhibits
2.1# Agreement and Plan of Merger among Pivotal Corporation, a
Washington corporation, Pivotal Merger Subsidiary, Inc.,
MarketFirst Software, Inc. and other shareholders of
MarketFirst Software, Inc. dated October 2, 2002.
23.1 Consent of KPMG LLP
------------
# Previously filed on Form 8-K dated October 29, 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: January 6, 2003
PIVOTAL CORPORATION
/s/ Divesh Sisodraker
-------------------------------------
Divesh Sisodraker
Chief Financial Officer
(Principal Financial and Accounting
Officer and Duly Authorized Officer)